Investing Basics: DIY Investing vs Financial Advice

 

It is now more than forty years since E*TRADE made its first online trade, and the rapid development of online investment platforms has delivered access to global markets and professional data-driven tools to an ever increasing number of retail investors. DIY Investor’s Christian Leeming considers the rise of digital services and the relative merits of do-it-yourself investing, and do-it-for-me investing – paying for professional financial advice

 

 

 

Financial advice

 

A traditional financial adviser will build a picture of your overall financial position, and will make a series of recommendations based upon your objectives and personal preferences; a fact-find will consider your income and outgoings, the life stage of your family and your long term goals.

Investments are just one aspect of a hollistic view of your finances, but they are used to help you achieve short, medium and long-term objectives, and prepare for key events such as tuition fees, buying a property or retirement.

A well constructed portfolio can help guard against the ups and downs of the economy and investment markets, and regular reviews ensure that you remain on track as circumstances and aspirations evolve over time; this is equally relevant for DIY investors.

 

DIY investing

 

DIY investors have a wide range of options when it comes to choosing an investment platform; largely based upon how hands-on an investor intends to be, there will be one that offers the right level of sophistication, at an acceptable cost for most people.

Appetite for risk is a key consideration when becoming an investor; ‘hair-on-fire’ investments may deliver a thrill when they are going in the right direction, but lying awake, sweating at 3am suggests that your chosen investments are out of whack with your risk tolerance.

A professional advisor will use a range of techniques to assess your ability, or willingness to take on risk, but in the DIY Investor world there are plenty of ways for you to take advantage of ever-evolving digital services without paying for financial advice.

Automated advice platforms – ‘robo-advisers’ in the vernacular – use algorithms in their onboarding process to match you with a portfolio of investments in line with your preferences, and may be a good option for those making the initial steps from saving to investing, but not yet ready, or not wishing, to select individual investments.

Robos such as Wealthify, Nutmeg, Moneybox offer risk-based portolios made up of low-cost passive investments such as exchange traded funds (ETFs) which track and deliver the performance of a wide range of investments at minimal cost.

For those wanting to be more involved, DIY investment platforms such as Hargreaves Lansdown, interactive investor and AJ Bell provide a wide range of tools to help investors research, build and manage their own investments.

 

How much is financial advice?

 

The cost of advice can vary significantly according to the level of service you want; those making recommendations may be less expensive than those that are mandated to make financial decisions on your behalf. Fees and commissions have been more transparent since the government’s Retail Distribuion Review banned hidden ‘trail’ commission on financial instruments making apples and apples comparisons simpler.

Advice firms may differ in terms of their charging structure; some charge hourly fees of between £50 and £250, while others charge a percentage of the amount you invest with them. Regulator The Financial Conduct Authority (FCA), says initial advice is charged at an average of 2.4% with ongoing advice at 0.8% a year.

In addition to ongoing advice, specific pieces of work such as inheritance planning or pension transfers may be charged at a set fee; advisers may offer a combination or a choice of different charging types.

 

What’s the cost of doing it myself?

 

A DIY investor is unlikely to incur upfront costs but platforms charge a range of fees based upon the type of service you choose; some investment platforms will charge you an annual fee, plus dealing fees if you choose to buy and sell stocks and shares, others may charge a set-up fee, and a number still have exit fees if you want to cash in or move your investments elsewhere.

Charges may be a flat fee or a percentage of the value of your investments, the former being preferable if you have a large amount to invest; you’ll also pay charges for the funds you invest in – on average, equity funds charge an annual fee of 0.75%, whilst passive funds have an average fee of 0.15%.

Robo-advisers typically charge an annual account management fee of between 0.25% and 0.75% of the assets you invest with them.

 

The pros and cons of financial advice?

 

Pros:

 

• A broad range of financial services, including investments, pensions, tax advice, insurance and retirement planning.
• Highly personalised advice based on your individual circumstances and objectives.
• Expertise and experience of economic challenges and market volatility.
• Sophisticated software such as cashflow planning tools.

 

Cons:

 

• Fees.
• Often only available to those with a large sum to invest – sometimes at least £50,000.
• Requires meetings and reviews.
• Comparison and selection of the right firm may be difficult.

 

The pros and cons of DIY investing?

 

Pros:

 

• Lower cost.
• Control and flexibility.
• Do it With me option of risk-based model portfolios or robo advice.
• Efficient tax wrappers such as ISAs and SIPPs.
• Accessible, with low minimum investments.

 

Cons:

 

• Investments only- no account of other savings or the ‘big picture’.
• No expertise or human support, DIY learning and knowledge.
• Frequent activity can increase costs.
• Managing and monitoring your portfolio takes time and effort.

 

And the winner is?

 

In the same way that the journey from being a saver to an investor is an evolution rather than a step change, DIY investing and financial advice exist on a spectrum. One extreme is a Do it For Me financial advice or planning service, where an adviser or planner looks after all aspects of your finances, and the other is a pure Do it Yourself approach, where you build and manage your own investments using an investment platform or digital investing service, without guidance or advice.

However, reality tends to be a little more nuanced, and by sitting somewhere between the two extremes there is the potential to get the best of both worlds; a growing number of financial advice firms operate hybrid models that blend advised and non-advised services. Similarly, in response to FCA guidance in 2023 that digital services could complement and extend the benefits of financial advice rather than replace it, some robos combine automated tools with access to a ‘fleshy’ financial adviser.

The optimum solution for you depends on a range of factors, including your goals and requirements, how much you’re investing, your level of knowledge and expertise and your risk profile.

Broadly speaking, if you need help with your overall finances, have more complex requirements rather than just investments and can afford to do so, a professional adviser will fit the bill.

But if you’re just looking to invest in stock market investments and feel comfortable making your own decisions, there are a wide range of different types of online and digital services available.

 

With increasing uncertainty about state provision of later life care and income in retirement, with cradle-to-grave healthcare under threat, the pernicious effect of tuition fees and the sky-high cost of accommodation, whichever route you choose, it is impotant that you start to do as much as you can, as soon as you can, to make financial provision.

And you’ll join the ever-swelling ranks of people taking personal financial control. When DIY Investor Magazine launched in 2014, it was estimated that 2.3m people had hands-on control of their finances; a decade on and a survey by Boring Money found that post COVID and the flock of ‘black swan’ events, there were 10.6m DIY investing accounts in the UK, each delivering the satisfaction and comfort that comes with being in financial control.

‘The best time to start investing was 20 years ago, the next best is today’ – acknowledging that you can only start from where you are, and a call to action, is just one of the very many slogans intended to get people to get involved; with a nodding acknowledgement to Nike we say ‘Do it Yourself, Do it With me, Do it For me – just don’t do nothing!’